November 17, 2010

Are high food prices good or bad for poverty?

It depends on whether the poor are selling or buying, of course.

High food prices benefit poor farmers who are net food sellers, and hurt poor food consumers in urban areas. Low food prices have the opposite effects. In each case, the net effect on poverty depends on the balance between these two effects. But you would hardly know it from reading what NGOs and international organizations have produced on the topic. (For my past instances of blowing off steam on the subject, see this and this.)

these basic principles are well known, [yet] we do not find them reflected in most arguments put forward in the food policy debate. For example, there has been hardly any mentioning of the benefits of low food prices for urban consumers and net consuming rural households during the pre-2006 low price era, and there has been very little emphasis in more recent statements on the benefits for producers in poor countries from high food prices.

In 2005, Oxfam International wrote:

US and Europe[‘s s]urplus production is sold on world markets at artificially low prices, making it impossible for farmers in developing countries to compete. As a consequence, over 900 millions of farmers are losing their livelihoods.

Three years later, following a substantial rise in food prices, Oxfam International’s view was that:

Higher food prices have pushed millions of people in developing countries further into hunger and poverty. There are now 967 million malnourished people in the world….

It is unfair to single out Oxfam since organizations like the World Bank, OECD, and the FAO have not been much better. So here is the World Bank in 1990:

The combination of depressed world prices and developing country policies which tax agriculture relative to industry have discouraged farm output and hence lowered rural incomes. Because the majority of the world’s poorest households depend on agriculture and related activities for their livelihood, this … is especially alarming.

And the World Bank in 2008:

The increase in food prices represents a major crisis for the world’s poor.

In other words, the news on the food prices front is always bad for the world’s poor, regardless of whether prices are rising or falling.

Why do these institutions always accentuate the negative? Swinnen argues the reason has to do with international organizations’ incentives to capture media attention, capitalize on “sudden shocks,” and emphasize the negative in the “news” (to which people seem to pay more attention).

Comments

Yes correct but you neglects externalities. Monoculture for example damaging environtment eventhough increasing price is on. Flooding is another example. This is because rising commodity price followed by fallacy of composition from herd insting.

You have to go deeper than this to get a sense of what's going on. Food prices are higher, yes. But that doesn't mean farmers' profits are higher. Increased costs of diesel fuel, fertilizer, pesticides, herbicides, seeds, transportation, increased volatility from flooding, drought, monetary instability, and decreased yields from soil degradation are all contributing to put the hurt on farmers around the world, and will continue to do so for the foreseeable future. Frankly, farmers (and small farmers in particular) lack the market position to increase their profit margin, despite increased revenues, as they face enormous pricing pressure from large distributors.

While the abnormally low food prices we enjoyed for most of the past 20 years are responsible for a lot of farmers going under through being simultaneously outcompeted by modern industrial agriculture and lacking access to the capital necessary to effectively compete, the inherently unsustainable nature of these practices is slowly coming home to roost. As the price of oil rises (dictated by increasing costs of extraction and growing demand from China), we will see food costs continue to increase. Very soon, local organic produce grown via soil-enriching labor-intensive permaculture farming techniques will achieve price parity. Grain will prove more problematic, as global demand for both meat and biofuels continues to grow, and the cost of inputs rises accordingly.

I think that it is important to see what economist at this International Organizations (i.e. World Bank, IMF, etc) are writing rather than expression of their leaders. And if one look at the papers you would see that this effect is included in the assesment. The results for most countries are still that poverty increased as a consequence of the rising food prices.

Some Selected Papers

The Effect of Rising Food Prices on Poverty in Honduras, mimeo. World Bank

Ivanic, M. and W. Martin (2008) “Implications of higher global food prices for
poverty in low income countries”, World Bank Policy Research Working Paper No
4594, Washington DC.

Good observation. I note this pessimism and scare-mongering to be the norm in nearly all aspects of global food security reporting, something that readers epinephrine levels respond to. I'm afraid that it has led to making me a perennial ag contrarian.

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